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Rajan says banks needs to review priority sector lending categories

The RBI governor said recent scandals underlined the need for better internal evaluation of lending processes and banking must become more engaged and informed

 

Reserve Bank of India (RBI) governor Dr Raghuram Rajan feels that the banking sector needs to question the categories under priority sector lending.

 

Speaking at a banking conference organised by FICCI, he said, "Select special sectors need ease of credit ... the biggest need for agriculture is long-term money while farmers don't get long-term loans because short-term loans are subsidised".

 

He said bankers need to "ask if students studying abroad are more needy?"

 

Reiterating a host of issues in the banking sector, Dr Rajan added that select special sectors need ease of credit. Interest subventions and loan waiver schemes can distort prices and lead to unhealthy borrowing practices, he added.

 

The RBI governor pointed out that the loan waivers, as proposed by the Andhra Pradesh chief minister, were not healthy for the banking system and could distort prices and the credit culture.

 

Further, he said the Pradhan Mantri Jan Dhan Yojna is an internal priority and that direct benefit transfers would reduce leakage and limit distortion of prices.

 

He also cautioned banks on duplication of accounts opened and asked them to ensure that the newly opened accounts work and make the scheme more effective.

 

The priority sector lending requirement currently is at a minimum of 40%, including sectors such as agriculture, education, rural housing, micro and small sector enterprises, among others.

 

It is time the government de-regulated diesel prices in the wake of falling global crude oil prices, the RBI Governor said.

 

He said falling inflation was consistent with the RBI’s forecast. According to the RBI Governor, the dip in IIP showed recovery was still uneven.

 

Recent scandals underlined the need for better internal evaluation of lending processes. Banking must become more engaged and informed, he said.

 

Rajan reiterated the call for more operational freedom for State-run banks.

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COMMENTS

MG Warrier

2 years ago

The concept of priority sector lending was introduced to ensure credit flow from the banking sector to certain neglected sectors including agriculture. The need for some persuasion to encourage banking system to provide adequate credit to priority sector is still there as banks on their own would prefer to deploy credit in bigger urban ventures. Several attempts to shift responsibility by lending to service/consumer sectors, investing in RIDF etc were allowed to achieve priority sector targets. Internal reviews by RBI or at state level forums also concentrated on ‘targets’ and their achievement and a comprehensive look at willingness and capability of each bank to finance priority sector especially in rural areas is yet to happen. Viewed in this context the loud thoughts by RBI Governor is most welcome. Still, the review need to be done by RBI and GOI and appropriate guidance should be issued to banking system

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